Evolutionary economics deals with the study of processes that transform economy for firms, institutions, industries, employment, production, trade and growth within, through the actions of diverse agents from experience and interactions, using evolutionary methodology. Evolutionary economics analyses the unleashing of a process of technological and institutional innovation by generating and testing a diversity of ideas which discover and accumulate more survival value for the costs incurred than competing alternatives. The evidence suggests that it could be adaptive efficiency that defines economic efficiency. Mainstream economic reasoning begins with the postulates of scarcity and rational agents (that is, agents modeled as maximizing their individual welfare), with the "rational choice" for any agent being a straightforward exercise in mathematical optimization. There has been renewed interest in treating economic systems as evolutionary systems in the developing field of Complexity economics.[citation needed]

Evolutionary economics does not take the characteristics of either the objects of choice or of the decision-maker as fixed. Rather its focus is on the non-equilibrium processes that transform the economy from within and their implications. The processes in turn emerge from actions of diverse agents with bounded rationality who may learn from experience and interactions and whose differences contribute to the change. The subject draws more recently on evolutionary game theory[3] and on the evolutionary methodology of Charles Darwin and the non-equilibrium economics principle of circular and cumulative causation. It is naturalistic in purging earlier notions of economic change as teleological or necessarily improving the human condition.[4]

A different approach is to apply evolutionary psychology principles to economics which is argued to explain problems such as inconsistencies and biases in rational choice theory. Basic economic concepts such as utility may be better viewed as due to preferences that maximized evolutionary fitness in the ancestral environment but not necessarily in the current one.[5]

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In the mid-19th century was presented[by whom?] a schema of stages of historical development, by introducing the notion that human nature was not constant and was not determinative of the nature of the social system; on the contrary, he made it a principle that human behavior was a function of the social and economic system in which it occurred.

Karl Marx based his theory of economic development on the premise of evolving economic systems; specifically, over the course of history superior economic systems would replace inferior ones. Inferior systems were beset by internal contradictions and inefficiencies that make them impossible to survive over the long term. In Marx's scheme, feudalism was replaced by capitalism, which would eventually be superseded by socialism.[6]

At approximately the same time, Charles Darwin developed a general framework for comprehending any process whereby small, random variations could accumulate and predominate over time into large-scale changes that resulted in the emergence of wholly novel forms ("speciation").

This was followed shortly after by the work of the American pragmatic philosophers (Peirce, James, Dewey) and the founding of two new disciplines, psychology and anthropology, both of which were oriented toward cataloging and developing explanatory frameworks for the variety of behavior patterns (both individual and collective) that were becoming increasingly obvious to all systematic observers. The state of the world converged with the state of the evidence to make almost inevitable the development of a more "modern" framework for the analysis of substantive economic issues.

Thorstein Veblen (1898) coined the term "evolutionary economics" in English. He began his career in the midst of this period of intellectual ferment, and as a young scholar came into direct contact with some of the leading figures of the various movements that were to shape the style and substance of social sciences into the next century and beyond. Veblen saw the need for taking account of cultural variation in his approach; no universal "human nature" could possibly be invoked to explain the variety of norms and behaviors that the new science of anthropology showed to be the rule, rather than the exception. He emphasised the conflict between "industrial" and "pecuniary" or ceremonial values and this Veblenian dichotomy was interpreted in the hands of later writers as the "ceremonial / instrumental dichotomy" (Hodgson 2004);

Veblen saw that every culture is materially-based and dependent on tools and skills to support the "life process", while at the same time, every culture appeared to have a stratified structure of status ("invidious distinctions") that ran entirely contrary to the imperatives of the "instrumental" (read: "technological") aspects of group life. The "ceremonial" was related to the past, and conformed to and supported the tribal legends; "instrumental" was oriented toward the technological imperative to judge value by the ability to control future consequences. The "Veblenian dichotomy" was a specialized variant of the "instrumental theory of value" due to John Dewey, with whom Veblen was to make contact briefly at the University of Chicago.

Arguably the most important works by Veblen include, but are not restricted to, his most famous works (The Theory of the Leisure Class; The Theory of Business Enterprise), but his monograph Imperial Germany and the Industrial Revolution and the 1898 essay entitled Why is Economics not an Evolutionary Science have both been influential in shaping the research agenda for following generations of social scientists. TOLC and TOBE together constitute an alternative construction on the neoclassical marginalist theories of consumption and production, respectively.

Both are founded on his dichotomy, which is at its core a valuational principle. The ceremonial patterns of activity are not bound to any past, but to one that generated a specific set of advantages and prejudices that underlie the current institutions. "Instrumental" judgments create benefits according to a new criterion, and therefore are inherently subversive. This line of analysis was more fully and explicitly developed by Clarence E. Ayres of the University of Texas at Austin from the 1920s.

More narrowly the works Jack Downie[8] and Edith Penrose[9] offer many insights for those thinking about evolution at the level of the firm in an industry.

Joseph Schumpeter, who lived in the first half of 20th century, was the author of the book The Theory of Economic Development (1911, transl. 1934). It is important to note that for the word development he used in his native language, the German word "Entwicklung", which can be translated as development or evolution. The translators of the day used the word "development" from the French "développement", as opposed to "evolution" as this was used by Darwin. (Schumpeter, in his later writings in English as a professor at Harvard, used the word "evolution".) The current term in common use is economic development.

In Schumpeter's book he proposed an idea radical for its time: the evolutionary perspective. He based his theory on the assumption of usual macroeconomicequilibrium, which is something like "the normal mode of economic affairs". This equilibrium is being perpetually destroyed by entrepreneurs who try to introduce innovations. A successful introduction of an innovation (i.e. a disruptive technology) disturbs the normal flow of economic life, because it forces some of the already existing technologies and means of production to lose their positions within the economy.[citation needed]

One of the major contributions to the emerging field of evolutionary economics has been the publication of An Evolutionary Theory of Economic Change by Richard Nelson and Sidney G. Winter. These authors have focused mostly on the issue of changes in technology and routines, suggesting a framework for their analysis. If the change occurs constantly in the economy, then some kind of evolutionary process must be in act, and there has been a proposal that this process is Darwinian in nature.

Milton Friedman proposed that markets act as major selection vehicles. As firms compete, unsuccessful rivals fail to capture an appropriate market share, go bankrupt and have to exit.[11] The variety of competing firms is both in their products and practices, that are matched against markets. Both products and practices are determined by routines that firms use: standardized patterns of actions implemented constantly. By imitating these routines, firms propagate them and thus establish inheritance of successful practices.[12][13]
A general theory of this process has been proposed by Kurt Dopfer and Jason Potts as the micro meso macro framework.

A different approach is to apply evolutionary psychology principles to economics which is argued to explain problems such as inconsistencies and biases in rational choice theory. A basic economic concept such as utility may be better viewed as due to preferences that maximized evolutionary fitness in the ancestral environment but not necessarily in the current one. Loss aversion may be explained as being rational when living at subsistence level where a reduction of resources may have meant death and it thus may have been rational to place a greater value on losses than on gains.[5]

People are sometimes more cooperative and altruistic than predicted by economic theory which may be explained by mechanisms such as reciprocal altruism and group selection for cooperative behavior. An evolutionary approach may also explain differences between groups such as males being less risk-averse than females since males have more variable reproductive success than females. While unsuccessful risk-seeking may limit reproductive success for both sexes, males may potentially increase their reproductive success much more than females from successful risk-seeking. Frequency-dependent selection may explain why people differ in characteristics such as cooperative behavior with cheating becoming an increasingly less successful strategy as the numbers of cheaters increase.[5]

Another argument is that humans have a poor intuitive grasp of the economics of the current environment which is very different from the ancestral environment. The ancestral environment likely had relatively little trade, division of labor, and capital goods. Technological change was very slow, wealth differences were much smaller, and possession of many available resources were likely zero-sum games where large inequalities were caused by various forms of exploitation. Humans therefore may have poor intuitive understanding the benefits of free trade (causing calls for protectionism), the value of capital goods (making the labor theory of value appealing), and may intuitively undervalue the benefits of technological development.[5]

There may be a tendency to see the number of available jobs as a zero-sum game with the total number of jobs being fixed which causes people to not realize that minimum wage laws reduce the number of jobs or to believe that an increased number of jobs in other nations necessarily decreases the number of jobs in their own nation. Large income inequality may easily be viewed as due to exploitation rather than as due to individual differences in productivity. This may easily cause poor economic policies, especially since individual voters have few incentives to make the effort of studying societal economics instead of relying on their intuitions since an individual's vote count for so little and since politicians may be reluctant to take a stand against intuitive views that are incorrect but widely held.[5]